Housing a Bright Spot in Fed's Latest Household Debt and Credit Report

James McAndrews, Executive VicernPresident and Director of Research at the Federal Reserve Bank of New York toldrna Household Debt and Credit Press Briefing on Thursday that three and a halfrnyears after the end of the “Great Recession” expansion remains sluggish withrnboth economic and job growth growing more slowly than in earlier businessrncycles and inflation remaining subdued. </p

These conditions were the basis forrnthe Federal Open Market Committee’s (FOMC) January decision to continue tornpursue its “highly accommodative” policy stance combining an exceptionally lowrnpolicy interest rate with forward guidance indicating that this range would remainrnat least until unemployment falls below 6½ percent, inflation is projected tornbe no more than 2½ percent between one and two years in the future, andrninflation expectations remain well anchored.  The FOMC will also continuernto purchasing securities until it sees substantial improvement in the outlookrnfor the labor market.  Combined, thesernactions are intended to ease financial conditions and thereby help to establishrna self-sustaining economic expansion.</p

Recent data on the U.S. economy havernbeen mixed with GDP declining slightly in the 4^th quarter of 2012rnand payment employment up by 157,000, well below the 200,000 monthly gains inrnthe fourth quarter.  The unemploymentrnrate edged up to 7.9 percent.  Beneathrnthe surface however there are indications that private demand firmed at the endrnof 2012 and is holding thus far this year. rnConsumer spending, especially for durable goods has strengthened, reflectingrnsome improvements in labor market conditions, consumer confidence, householdrnbalance sheets and access to credit.</p

McAndrews said another major plus isrnthe housing market with housing starts, home sales and home pricing allrntrending up.  In 2009 residentialrninvestment was a 0.4 percentage point drag on GDP growth; in 2013 it is likelyrnto provide a boost to growth on the order of 0.5 percentage point.  Also up are business investment in equipmentrnand software and orders for nondefense capital goods.  Survey-based indicators of manufacturingrnactivity also have begun to improve in several other major economies around thernworld.</p

“Of course the quickening pace ofrnauto, home, and capital goods sales and orders, all interest-sensitive goods,rnis consistent with the highly accommodative stance of monetary policy, whichrnnot only lowers interest rates but enhances credit availability as well.” McAndrewsrnsaid.</p

Along with these positive economicrndevelopments, there has been a notable increase in risk appetite amongrnfinancial market participants over recent months, although there was somernpull-back and volatility this week following the election results inrnItaly.  From their recent lows in mid-November, equity prices in thernUnited States are up around 10 percent.  Credit spreads also havernnarrowed.  </p

McAndrews said several factorsrnadvise caution.  First, for the lastrnthree years enthusiasm in the new year has turned to gloom by midyear.  Second, households are still adjusting tornJanuary 1 tax adjustments which reduced disposable income for many.  Third, while the full fiscal cliff wasrnavoided in early January, there are many policy issues remaining, including thernsequester.  If the latter does happen andrnremains in effect for the full year it could reduce projected real GDP growthrnfor 2013 by about ½ percentage point on top of the ¾ to 1 percentage point dragrnfrom already-implemented fiscal policy actions.</p

On the topic of household debt andrncredit, McAndrews said that researchers at the New York Fed have put considerablerneffort into improving public understanding of consumer debt and creditrnconditions.  As McAndrews put it, “Consumerrndebts occupy the intersection of Main and Wall Streets, and are thus of greatrninterest to the public.”  He added that,rnby most accounts the financial crisis grew out of the mortgage market, thernlargest and most important form of consumer debt.  </p

The Fed’s quarterly report hasrndocumented the enormous rise in consumer delinquencies and defaults as thernhousing bust and the Great Recession unfolded, and, over the last several yearsrnhas provided an in-depth look at the largest reduction in household debt thernFed has ever recorded.  Since it peakedrnin the third quarter of 2008 household debt has fallen by $1.3 trillion-aboutrn10 percent-mostly because of declining mortgage balances.</p

The fourth quarter of 2012 report</awas released on Thursday and shows some clear signs of healing in consumer debtrnmarkets.  First, and perhaps most interesting, the data indicate that thernrecent improvement in the housing market was accompanied by a slight increasernin the level of household debt.  It is too soon to conclude that thisrnmeans households are beginning to increase their debts again but there arernsigns that the four-year long contraction is slowing.  Consumer delinquency rates continue to recoverrnas well and overall delinquency rates are now back to pre-recession levels – aroundrn8½ percent – but not to the 3-5 percent rates that prevailed in the first halfrnof the 2000s.</p